Ladies and gentlemen, good day and welcome to the GFL Environmental Incorporated Investor Update Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrick Dovigi. Please go ahead, sir.
Good morning, everyone. I'll turn it over to Luke quickly just to give a little statement on the forward-looking statements. He'll pass it back over to me and we'll get into the details of the call.
Thanks, Patrick. Good morning, everyone. As Patrick said, before we get started, note we filed our press release, which includes information, and we've also prepared a presentation to accompany this call. It's also available on our website. During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with Canadian and U.S. securities regulators. Any forward-looking statement is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today's date.
We do not assume any obligation to update these statements, whether as a result of new information, future events and developments, or otherwise. This call will include a discussion of certain non-GAAP measures. A reconciliation of these non-GAAP measures can be found in our filings with the Canadian and U.S. security regulators. With that, I'll turn the call back over to Patrick.
Thanks, Luke. Thanks for everyone for joining us this morning. I thought what would make sense before we get into the meat and potatoes of the actual acquisition. I thought it'd make sense just to give a six-month refresh as we're coming up on six months post-IPO, and just refresh everybody on the stories. Some participated in the IPO, some weren't. Just to level set what our expectations were at the time of actually doing the IPO and some of the reasons why we did the IPO. We talked about during our IPO marketing, I think a big focus of what we were focused on as a management team was we operated as a private company with 6.5 to seven turns of leverage for almost 13, 14 years.
We saw a real opportunity to de-lever the balance sheet 6.5-4.25 turns. Which was paramount and important for us as we looked forward at the next pieces of the puzzle in terms of our U.S. expansion. Those two pieces of the puzzle were the Advanced Disposal and Waste Management divestitures and WCA, which we now signed up. In order to do that, we needed to create incremental balance sheet capacity and a public currency in order for us to help us execute on that transaction. Along with that came with the ability to drive incremental free cash flow out of our business by lowering our overall interest costs.
We made a strong commitment to all of the public investors that we wouldn't take leverage above 4.5x for a short period of time for the right acquisition. Now as looking forward, those pieces of the puzzle came forward. Those were the two largest pieces of the puzzle. We've now executed on those. Through all of that, I think when you look at it, we executed a very unique piece of paper by way of a perpetual preferred share with a shareholder that knows us extremely well. Again, this shareholder came in in 2014 with us, invested at almost CAD 3 a share, sold in 2018 at around CAD 12 a share, and now is agreeing to buy back in at CAD 25+ a share.
I think that confidence and the ability with an investor who's been with us for seven years is saying something. I think that allows us to remain true to what we said by not taking leverage above 4.5x . I think when you think about some of the benefits that we've seen, from COVID, and we've navigated the COVID situation, I believe as a management team extremely well. Even with COVID and one of the most severest downturns for a quarter that anyone's ever seen, our leverage did not uptick through that downturn. We see cost of capital coming down significantly since us going into the IPO. You put that all in a blender. I think, the upside case for our strategy, which is both going organically and through acquisitions, is paramount.
I think as we look forward and the opportunities we have to refi our existing balance sheet, as well as finance some of our new M&A through a combination of free cash flow and incremental borrowings, either through our bonds, term loans, or revolver, set this up even more favorably well than we were going into the IPO. When I look forward from here, the big focus from here is on de-leveraging. We're taking leverage up to the mid-4s for this acquisition. These were the two, again, biggest pieces of the puzzle that existed for us, that we believed that we could get our hands on, and which was a big catalyst of why we actually did the IPO.
Again, the next 12- 18 months is going to be focused on integration, leveraging our total spends on the procurement side, operational synergies, and just basically onboarding everything onto our one common platform. We've done this 140+ times. We're not worried about execution. We spent a ton of time preparing for this. We've been working on WCA since June of 2019, and the WM assets and ADS assets for, again, over the course of the last year since that deal's been announced. We do not need any more equity. I know that rumor has been out on the street that we were going to be out going searching for and doing some form of equity offering. I can tell you today, we are not doing another equity offering.
Given the free cash flow of the business and the perpetual preferred, there is no need for us to go back to the market for equity. We are going to get back to our sort of bread-and-butter tuck-in acquisition, CAD 1 million-CAD 10 million of EBITDA. Now that, just with the expanded footprint of now being able to operate in 27 states in the U.S. and the nine provinces in Canada, the canvas just got bigger for us to continue executing on those opportunities as we move through the integration of these two larger opportunities. I just wanted to highlight that to refresh everyone's memories on what we said, what we've now done, and what we're focused on moving forward. I think, post-WCA, there's not another larger-scale opportunity that's in our horizon at the moment.
We're just going to focus on getting these integrated properly and then focusing on tucking in the smaller M&A deals that we've talked about acquiring, sort of 25- 30 deals a year of CAD 1 million-CAD 10 million of EBITDA. A little bit on WCA, and then I'll turn it over to Luke to get into the weeds on the financials. WCA is a business that was known very well to us. Again, Macquarie being the largest shareholder of that business. Common ownership with us previously, as well as with Waste Industries. Ven Poole, who sits on our board and from the founding family of Waste Industries, was on the board of WCA for a long period of time. We had a very deep, intimate knowledge of the business, and the current COO of WCA worked with our COO, Greg Yorston, for a long period of time.
They operate on the exact same operating platform as us. From an integration perspective, very straightforward integration process. Under the watch of Bill Caesar, really done a great job of putting in multiple disciplines with that business and transforming that business really over the last seven, eight years. When you look at the business today, it's basically 89 operating facilities operating in 11 states, 37 collection operations, 27 transfer stations, three MRFs, and 22 landfills. The bulk of the operations are in Texas, Missouri, and Florida, which are highly complementary to the assets that we bought through the Waste Management and Advanced Disposal divestitures, which made this fairly attractive. It gives us a very nice new breeding ground in Oklahoma, Arkansas, Kentucky, Colorado, which is an adjacent market to our Denver operations, Alabama, Tennessee, New Mexico, and Kansas which are very exciting for us.
I think when you look at the way we think about return on invested capital and the modeling for this, it was very straightforward for us. This is on the upper end range of what I told people it would require to pay for platform businesses. But the way we look at it is very simple. No multiple expansion, which we do believe over time we will get, but assuming you didn't get any new multiple expansion, growing the business organically without taking into consideration any sort of incremental synergies, growing the business organically at sort of 4% a year and acquiring approximately sort of CAD 10 million of EBITDA a year at roughly 7x within those new markets that we're going into, spits out an IRR for us of sort of 15%-16%.
Obviously, if you get incremental margin expansion on the total business, those numbers get turbocharged even more. We ran it at a constant entrance multiple today, which we think over time, we will be able to expand that multiple significantly. From the business itself, basically CAD 283 million of it comes from the collection side, CAD 94 million comes from post-collection operations, and then CAD 30 million is just spread through a bunch of other services. Again, highly complementary to our existing business, and we think it fits really well. Again, one of the last pieces of the puzzle for us to execute on. With that, I'll turn it over to Luke, and then I'll open it up to the operator for any questions. Then we'll go from there.
Thanks, Patrick. On page six of the presentation, we've put a sort of illustrative sources and uses. If you look at the full pipeline between WM ADS, the WCA, as well as just our regular M&A pipeline, there's going to be a need for more capital to come in to finance that pipeline. As Patrick spoke about the new equity, and the consistency of that with our maintaining our leverage philosophy, and not taking overall leverage higher than we had suggested we would maintain it at. What this presentation assumes is that you do another sort of $750 million financing to fund the entire pipeline. The actual financing will be to be determined. You probably need 450-500, but we'll look at anywhere between that level and sort of 750 for illustrative purposes on the pages that follow.
This is just assumed you do a $750 million net new financing. On the page, you can just see some high-level terms of the preferred equity. Again, as Patrick said, effectively, HPS will be coming in and investing CAD 600 today. That will ultimately convert to common at a predetermined conversion price of approximately CAD 25. When you look at page seven, what we've done on page seven is really lined up what we have today, and then layering on the impacts of WM ADS and WCA. If you look at the first column, those are just the numbers as reported at Q2. The second column reflects the GFL outlook for 2020 before considering these acquisitions. There's an appendix at the back that sort of reconciles that.
As you can see in that middle column, the top half of the chart is P&L and cash flow, and the bottom half of the table is the balance sheet metrics. As you can see in that second column, standalone GFL today and the year, roughly CAD 1,050 of EBITDA. At the leverage level, there's a little bit of FX playing into this, but roughly 4 x, which was consistent with what we historically said. Columns three and four layer on the WMADS and WCA opportunities. We've just included the amounts at the top, the pro forma amounts that we underwrote. As we've spoken about the synergies and what's been included in there, we think we've taken a conservative approach, and there's some upside to the numbers. For purpose of this table, we just used those underwritten pro forma amounts.
These are the U.S. dollar amounts converted to CAD. Additionally, what you can see in the middle is we've put the capital intensity of each of the businesses. Slightly more elevated for WMADS, considering the mix out the gate, a very high landfill concentration, and then something in the middle, WCA, for the more well-rounded business and not as landfill heavy as WMADS. If you take all of that together and you look at the last column, what we're really suggesting here is that this is the launch-off point at the end of 2020 going into 2021. What you can see from that is there's about CAD 1,340 of EBITDA, about a CAD 480 million CapEx need, and roughly CAD 300 million of interest that I'll talk about a little bit more on the next page.
If you think about that, 1,340, 480, 300, that's a CAD 560 million net number, back out about CAD 60 million for closure, post-closure, our minimal cash taxes and otherwise. It leaves you with about a CAD 500 million free cash flow number. That would really be your launch off point. If you think about 2021, while we're not giving specific guidance on 2021 at this time, you take a number like 500, you layer on some organic growth, whatever your assumption of that may be, as well with your M&A assumption, and you very quickly get to a double-digit free cash flow growth going into 2021. We wanted to provide that just to level-set people's ideas around what the launch off into 2021 is.
On this page, I just want to highlight at the bottom of the page, you can see the leverage level pro forma for this. As Patrick said, getting the equity check to maintain that commitment at the high end of mid-4s. You can see that this shows 4.62 at the end of the year. With FX, it'll be plus or minus in that range. As Patrick said, if you think about the free cash flow going forward, even if you're taking all of the dollars to invest in the tuck-in M&A program of the 25-30 deals a year or so we can do, the business is going to naturally de-lever close to 50 basis points a year. At that pace of M&A investment, if you roll this forward, by 2023, you're in a number of low 3s leverage. That's the plan.
As Patrick reiterated, that was the plan from the beginning and continues to be the plan. We're just going to be starting from a higher EBITDA base. If you look at the next page eight, just to circle back on the interest cost we're considering here. What we've shown in the top half is our current debt obligations, what the current coupon is, and where they're trading. Then towards the bottom, illustrative new financing to fund the overall M&A pipeline. The rates on the new financing will be determined when we go to effect that, looking at where the current debt, the current bonds are trading in the far right column there, you could assume you're going to have an incremental annual interest expense of somewhere in the CAD 35 million-CAD 40 million on CAD 1 billion of new debt.
What I'd also like to highlight on this page is the refinancing opportunity that Patrick spoke about. If you look before considering the new financing we're contemplating, if you just look at the CAD 5.1 billion across the term facility and the bonds and the coupons that are in the second column, you can see the illustrative annual interest on that is about CAD 260 million. In the right column, you see where all of those bonds are currently trading. Just for illustrative purposes, if you were to recalculate the coupon based on the current trading rates, you'd get an annual interest expense of about CAD 200 million. About a CAD 60 million delta, if you look at what the coupons are versus where those bonds are trading today.
More specifically, if you just look at the bottom two bonds, the 7% and the 8.5%, those two instruments become callable in 2021 and 2022. Those are their first call dates. You can see the coupons currently on those at 7% and 8.4%. If you were to simply refinance those at rates close to where they're currently trading, you can see about 3.7%, 3.8% is where they're trading. That would represent CAD 40 million in annual interest savings. Again, when you think about the free cash flow levels, we're saying before, sort of CAD 500 launch off point going into next year. To have a CAD 40 million sort of refinancing saving right under our nose, again, is another sort of 7%- 8% of incremental free cash flow growth that isn't aspiration. It's just a matter of time before we go out and sort of refinance those.
Then obviously, as illustrated here, there's opportunity above and beyond that, across the broader capital structure. That was really the point of this page. Again, wanted to tie the pieces together, to give folks a clear basis as they're assessing appropriate sort of launch off point for 2021. The broader deck, just to provide an update on WCA. With that, I'll pause. Patrick, unless you had anything else, I would suggest that we turn it over to the operator, open for questions.
Yeah. Thanks for that. I think all of this was consistent with what we told investors when we were actually marketing the IPO, and I think when you look at it now, investors asked us what the art of the possible was for GFL over the next five years. And when you looked at what was the art of the possible, we thought we had a clear path to take EBITDA from CAD 1 billion, CAD 1.1 billion to closer to CAD 2 billion over that five-year period. These two largest pieces of the puzzle sort of put us on the trajectory for that now. So when you sort of roll that forward, like Luke's talked about, sort of looking at 2021 without giving forward guidance of somewhere between CAD 1.4 billion and CAD 1.5 billion, I think we're well on that path.
Given the tuck-in acquisition program that we know we can continue to execute on, plus realizing the synergies that we're gonna realize from putting these businesses together, I think that position does very favorably now for the next sort of 4.5 years, as we move forward. With that, I'll turn it over to the operator to open it up for questions.
Thank you. Ladies and gentlemen, at this time, the floor is open for questions. If you would like to ask a question, you may do so by pressing star one now. If you are on speakerphone, please make sure that your mute functions is disabled to allow your signal to reach your equipment . Again, to ask a question, please press star one now. Our first question comes from Hamzah Mazari with Jefferies.
Hey, good morning. Thank you. My first question is just around and I think you alluded to this, Patrick, a little earlier with some of the management team at WCA and your management team. Maybe walk through, you're closing two large platform deals pretty close together. Just walk us through integration risk, timeframe for the synergies you've outlined. Does COVID make this integration process a lot tougher than deals you've done in the past? There has been some time, in terms of, you've done a large deal, a quarter or two later, there's been another large deal. Waste Industries was a big platform deal two years ago. These are coming very quickly together. Just help investors get some comfort around execution.
Sure. Again, they're being announced simultaneously, but I think the pre-work that has gone into both the WM ADS assets and WCA has been ongoing for almost 12 months today. I think when you look at what we're doing today in the organizational structure, we're basically creating two new regions for GFL. One is really through the Midwest and the Wisconsin, Illinois market, then you sort of have the WCA assets. Colorado will go into our existing business, it's really sort of Texas, Missouri, Oklahoma, that whole area will come together as another region. The rest of the businesses are gonna tuck into our existing operations in the Southeast. Again, all the names are on the pages, the positions are in place.
Again, when you think about how GFL was built, from day one, we had a belief that everything comes on to sort of one operating system, one financial system, and that ERP spend has been what's allowed us to continue to grow to this level that we have. Taking this from zero of revenue in 2007 to call it CAD 4 + billion, now going to CAD 5+ billion, it's really the back office and the amount of time that we spent on integration and our finance team to be able to integrate these assets relatively seamlessly. When you think about ADS and you think about WCA, the bulk of the assets that we're acquiring are already on TRUX. TRUX is the name of the operating platform. From an integration perspective, our integration team is very familiar with the operating platforms.
Again, the pre-work has been done, so I think bringing it in is gonna come in relatively seamlessly. When you think about synergies, we're taking the underpromise and overdeliver approach here. Yeah, the headline number might look a little bit more expensive, but I think over time you're gonna see a multiple get bought down. When you think about some of the corporate costs of WCA alone, it's CAD 18 million. When you look at procurement savings, for the relatively easily tangible stuff to get out, whether it's health and benefits, insurance, et cetera, the number that we posted sort of day one of CAD 10 million is, I would say very conservative. Again, we want to show the market that we're gonna underpromise and overdeliver. I wouldn't worry. We've done this 140+ times.
Acquisitions and integrations are paramount to our strategy. This is what we do, this is what we get paid to do, and this is what we've done well for the last 14 years. It's not something I would worry about. Like anything, the climb to the Mount Everest, to the top of Mount Everest isn't straight, so it's always a little bit of a winding road. At the end of the day, we've been there, done it, seen this multiple times. It's not something that concerns us. If it concerned us, we wouldn't do it. Again, I own too much equity in this to make mistakes. At the end of the day, we're very well positioned to do this, and it's something If I'm not concerned, investors shouldn't be concerned. That's the way we think about it today.
Hamzah, one other point that I'd add to that is on the WM ADS sort of carve-out. It's a bit of a unique situation when you think about some of these integrations in that WM and ADS are very motivated and incentivized to help us with that back office integration, really, to be honest, to get out of their hair, right? They can focus on their real prize of integrating their business. I tip my hat to the folks, the IT folks particularly of WM and ADS, who have been working tirelessly to prep the whole transaction for a seamless transition there. I feel very fortunate. Not only do we have the full heft of our sort of IT and integration team working on it from our end, but getting meaningful support and prep from highly capable and good people at WM and ADS.
I can't overstate how beneficial that is to ensure we're going to have a sort of seamless thing and how grateful we are to having that sort of dynamic, which I think ties back into Patrick's comment that we feel we have this sort of well in hand.
That's very helpful. Just my follow-up question, I'll turn it over. The preferred financing structure seems very unique here. Other industrial companies have used this structure, and it looks like you're financing with equity at a 25% premium. You alluded to the investment partner making money with you historically, and the comfort level there, which is great. Maybe just walk us through how investors should think about the cash flow implications of the preferred. I'm referring to the PIK, I realize it's not dilutive until stock goes above 25. Just help us understand sort of the cash flow mechanics of the preferred. Thanks so much.
There is no cash flow impact because it's all PIK. Like we talked about last night, I think when you think about it today, basically, if you ran that forward for year, it would be an incremental sort of roughly 28 million-29 million shares that would convert. That's sort of the way we're thinking about it. I think the unique part about this piece of paper is versus others, we wanted it to get 100% equity treatment. We spent a lot of time with our auditors ensuring that it did get 100% equity treatment. One of the big things that the investor needed to get comfortable with was that there was very little downside protection or no downside protection.
Again, listen, the simple view from them was you cannot buy a business like GFL with a free cash flow profile going into an interest rate environment that we're going into at anywhere between sort of 10 and 11 times today. It just doesn't exist. At the current trading levels, when you look at 2021, our business is trading at 10-11 times. To buy a business of this quality with this free cash flow profile, it's impossible today. That's what got them comfort. I think coming from the other side as a private investor, and they think about enterprise value and what these businesses trade for in private equity or infrastructure funds' hands. It's a no-brainer. That's what got them over the edge.
I think, again, given the relationship and the amount of money that we've made for them over the years just made it a very logical fit for us. I think should demonstrate to investors, public investors, that someone that's been in before, sold, has now come back in at a substantially higher price. Forget the per share price, just on an enterprise value basis. I think should give people a lot of comfort in terms of someone that knows and has been with us for a long time.
Great. Thanks so much.
Thank you. Our next question comes from Brian Maguire with Goldman Sachs.
Really good. Good morning, guys, and congratulations.
Thanks.
Two months in a row here. Patrick, you've talked in the past about acquisitions being a mix of gold, silver, bronze, and then maybe a little bit of lead. Just wondering if you could give us your thoughts on the assets you're acquiring and kind of mix within those categories? Then also for those of us less familiar with them, any franchise markets in there, or maybe just comment on the mix of urban versus rural or secondary markets?
Sure. A lot of questions in there. I think when you looked at buying businesses from Macquarie, their strategy is always a great thing. Given they're more of an infrastructure fund, there's less of a focus on M&A. When you look at what they've done with the business since they bought it, WCA back in the day was a bit of a story company with a lot of random assets all over the place. I think under the guidance of Paul Mitchener and Bill Caesar and what they've done with the business. We tooled it, got rid of a lot of the lead, and really focused on the core markets and good markets where they wanted to expand their business.
I mean, when you look at the assets they have in Texas, and they look at the assets they have in Florida and through Missouri, I think those are, again, trophy, very difficult to replicate assets, which are hard to get our hands on. Then they have the new emerging markets, which I think provide a blank canvas to us, which we're very well experienced in operating in like Oklahoma, Arkansas, Kentucky, through Alabama and Tennessee, as well as Kansas. I think that gives us a very nice continued breeding ground for us to continue rolling out our expansion plans. When you think about it, outside of Houston, the bulk of those markets, we would consider more on the secondary side than primary side. I think, again, it's a very rare set of assets that you're able to get your hands on.
When they come up, you have to execute, because when you look at this isn't the first time we've done this. I mean, we acquired the Matrec assets from TransForce for 10 x, and we did that in 2016 or late 2015, beginning of 2016. One of the best assets we ever acquired. Again, it was owned by a public company that didn't have a huge focus on really growing the business. It was just growing organically. When you look at the capital that Macquarie invested in WCA, basically cleaned up the assets, refreshed the fleet, got everything back to where it was, but didn't really do a ton of M&A over the last eight or nine years in those markets.
Couple those together, I think with our expertise, given where the base business is there, I think you have a perfect recipe for success, in my opinion. Augmenting the ADS and WM assets that we're getting, again, it just makes us significantly stronger down in the South and the Southeast than we were even six months ago. I mean, WCA and Waste Industries were supposed to come together a long time ago. I mean, Waste Industries had a deal to buy WCA back in 2012. There was a Clayton Act issue that didn't allow those two businesses to come together. That's why Macquarie had owned WI and WCA independently of one another. It was just a matter of time before they come together. Now we've assembled all these pieces and really made another national player.
Okay, thanks. Just to follow up, I think, Patrick, you referenced an IRR somewhere in the mid-teens.
Without multiple expansion.
without multiple expansion. Just wanted to understand, because if I just look at slide seven, just running the EBITDA less CapEx over the purchase price, it implies more like a 6% kind of unlevered return. Is the delta there just the forward growth assumption, some of the M&A opportunities, and then the leverage profile? Are those the big differences?
Correct. Yeah. When you run it forward, that's the sort of math. You're acquiring basically CAD 10 million of EBITDA at sort of 7x. In that borrowing, we're using four turns of leverage at about 3.5%. You roll that forward over a five-year period, you get to sort of a mid-teen IRR without multiple.
Got it.
Yeah, Brian, with no M&A, just the organic growth, and that sort of cap structure that Patrick said, it's like a low double digit. You put the modest M&A of CAD 10 million, and that drives the return to a 15%.
Okay. Thanks very much. Take care.
Thanks, Brian.
Thank you. Our next question comes from Tyler Brown with Raymond James.
Hey, good morning, guys.
Hey, Tyler.
Hey, Luke, how was the deal structured, and what are the implications on cash tax paying status into the future?
Today, it's a sort of equity. We're still finalizing the exact structuring to try and make it as efficient as possible. It's primarily a sort of equity purchase. This will not provide the same level of step-up as, say, the WM ADS transaction, but we are looking at structuring considerations to help bring as much tax efficiency as possible. Where we sit today, even in the worst case scenario, you're still a four-year plus non-cash taxpayer. As we look to make this as efficient as possible, may have opportunities to continue to push that out.
Okay. That's helpful. On the 22 landfills that are expected to convey, how does that fleet look? Are there any material landfills in there that are slated to close in, say, the next five years? Just anything there that we should be thinking about?
No.
No. Okay. Just my last one, this is a bigger picture question. I think on the roadshow you talked about the fleet being around seven years. That would be legacy GFL. I'm just curious where the fleet is for WCA, and maybe even broader, what would you say your pro forma fleet age would be with ADS and WCA?
I think seven includes the liquid waste fleet, which is a little bit older just because those vehicles last longer. I think if you think about our solid waste fleet, we're sort of in the six to 6.5 year range, which is right down the middle of the fairway. WCA, again, under Macquarie's watch, made significant investment in their fleet over the last three years. They ran at over 15% maintenance CapEx in that business to get that fleet sort of up to par. I think we're going to be sort of in the six to 6.5 year on our solid waste fleet.
Okay, great. Lots of good detail in there. I appreciate the time.
Thanks, Tyler.
Thank you. Our next question comes from Jeff Silber with BMO Capital Markets.
Thank you so much. You went into a lot of detail on the integration and why you're comfortable with the risk. I'm going to ask, I guess, an opposite question. Is there any benefit, or are there any benefits, integrating two large assets at the same time?
No, I don't think so. Other than having everyone's attention focused on the integration and getting back to sort of business and putting in place a clear organizational chart, so everyone knows their sort of roles and responsibility and who's going to sit in what chair. Outside of that, no, I don't think there's any material benefit.
I'd say the one thing, though, Jeff, to consider, if we were to integrate one, again, is it nice for all the opportunities to come in a nice linear cadence, like many of the models say? Yes. Sometimes they come in this manner, like the real world.
I'd say the one thing, though, it's interesting and a unique timing for us, as our integration team is looking, thinking about considerations that you would have done for WM ADS standalone, but now considering WCA, that is sort of augmenting some of the decision-making and perhaps a unique perspective to avoid if we would have done WM and ADS, then six months later, you're like, "Oh, I wish we would have done XYZ knowing that WCA was coming." I think, the one benefit I guess I'm trying to articulate is having the holistic view of looking at the needs across both is ensuring we're making decisions that are right for both today and what could avoid an otherwise decision-making that at the time seemed right, but for the subsequent WCA wouldn't have been optimal, if that makes sense.
Okay. Yeah, no, that's actually very helpful. I think you had mentioned that you expect the deal to close next quarter. Can you just remind us what milestones we should be looking for? I know looking at the map, it doesn't look like there's any overlap, but are there any potential divestitures that you might anticipate?
No, we don't think so. We've clearly, this is more about strengthening our presence than overlap. Outside of the Jacksonville market, which the assets we're getting from Waste Management are completely complementary. Again, we're acquiring commercial front-load routes in Jacksonville, where WCA is mostly on the roll-off side in Jacksonville with no commercial front-load. Again, that is just strengthening us in that market. You look through Alabama, again, no direct overlap, just strengthening us in that market, and then sort of filling out the Midwest for us without any overlap. Again, from a DOJ perspective, we don't see a material issue here. We plan to make our filing in the next 12 days, but we think it should be a relatively straightforward process.
Okay. Thanks so much. Appreciate the color.
Thanks.
Thank you. Our next question comes from Michael Hoffman with Stifel.
Hey, Patrick, Luke.
Good morning.
Good morning. Can you walk us through now having expanded the whole company by 25% in sales and almost 30% in EBITDA, what's the cadence of the free cash flow conversion rate, whether it's percent of revenues or percent of EBITDA? You're kind of at eight, nine-ish now. If I look out five years, you've added this, you de-lever, you refi. How do I think of where I'm ending in kind of a little bit, without it being guidance, I get it, but a little bit of how does that play out?
Michael, I think you're right. If you look at the math today, it's a sort of high single digits. If you sort of roll that forward, I guess you have a couple things that are going to be the material drivers. Obviously, the anticipated plans around base EBITDA margin expansion, and whether you're modeling that at 10, 15, 30 basis points, 50 basis points, whatever you have there, that falls down. The pivot to a self-funding in that the debt stack is not increasing, you're going to start leveraging that fixed interest cost base that we have today. Leveraging that as the interest expense as a percentage of revenue comes down, as interest expense stays fixed and revenue grows, you'll get some points out of that.
The refinancing opportunity, in general, as I spoke on the call, if you're taking the blended coupon from sort of 5+ to, let's call it 4, there's an incremental couple basis points coming out of that. The M&A, the tuck-in that's self-funding, is highly free cash flow accretive, right? As there's no incremental sort of cost on that. If you put that all together, and even with some very conservative modeling assumptions, I think no matter how you cut it, if you take that out four or five years, you're at a sort of mid-teens free cash flow conversion as percentage of revenue. I think if there's incremental, if we're being conservative on the interest side, if we're being conservative on the margin expansion side, and if we're being conservative on the M&A opportunity, well, that would all be additive to that number.
I think even under the most conservative modeling, you take that nine today, the double digits next year, and you get to a mid-teens by sort of 2024, 2025, no matter how you're modeling it.
Are you assuming you're paying cash taxes at that point?
By 2025, you would start pivoting to a more cash tax there at the current rate. Again, with the M&A and the investments that we're making here, I think you'll be able to likely continue to sort of push that out. Yes, at some point you would have to burden it with a cash tax number.
Right. Okay. The next question is, you've shown us through your 140 some acquisitions. You do a couple big landmark ones like Waste Industries. You took mid-ish 20s margins, 25, 26, 27, and turned it into 30 here in the second quarter. Is there a path to 30 on this book of assets? Do they have that in them as you play out this model?
I mean, I'll echo.
I mean, Okay.
Go ahead, Patrick.
No, go ahead.
I was just going to say, if you look and, again, give the credit to the current WCA management team and what they've done in terms of retooling the business and bringing it from a sort of low 20s up to mid and going higher from there. I think organically, they've been pulling the right levers and doing a phenomenal job with the base business that they had. Now if you look at the opportunity to integrate and overlap with some of our other assets and the improvements that can come out of there. Then the smart tuck-in accretive M&A and what that can do to a sort of blended business coupled with the back office sort of redundancies and leveraging our corporate costs to sort of support this.
I think you put that all together, and you can get that running up to a comparable margin profile that the base GFL today is reporting. Patrick, I am not sure if you have anything else to add.
No, you said it perfectly.
One last one for me. What's the trigger why HPS would convert? I mean, let's say the stock goes to CAD 25.20 tomorrow and stays at CAD 2,520. It never goes below that. What's the trigger why they convert?
I mean, why they would convert?
Yeah. I mean, it's a perpetual preferred.
Yeah.
There's no mandatory, and in year five, after year four, you start paying cash if you haven't converted.
No, Michael, that's an option, the cash pay. The way the instrument works, it accretes up at 7% PIK. Starting year four, I have the option to cash pay, but that's at my option. It can keep accreting up at PIK for life.
Okay.
if the stock runs up, by the time you get to year four, by the time you get out there, if the stock's 150% of where we are today, then I can force the convert. Again, if the stock goes up, arguably, they're not going to sit in that forever, and presumably, this is a, I don't know the right way to frame it, Patrick, in your mind, but this is probably a three to four-year piece of paper that sits out there.
Yeah.
But.
Yeah. I mean, I get it. If the market understands how to value this correctly, you'll be at $30 and you get to force the conversion.
Correct.
Correct.
Right. Okay. Cool. Thanks. Good luck. Congratulations.
Thanks, Michael.
Thank you.
Thank you. Our next question comes from Adam Wyden with ADW Capital.
Hey, guys. Congratulations. I thought I'd have to be waiting for this deal for a lot longer, but sometimes good things fall in our lap sooner than we expect. I just have a couple housekeeping questions. Based on Luke's commentary, bringing your weighted average cost of debt from about 5.5 to four, that would imply that you're financing this thing in the debt markets at somewhere under four, like maybe in the 3.5 range, and given where your bonds are trading. Is that kind of how we should think about incremental leverage going forward for tuck-in M&A that you guys can fund in the debt markets in the mid threes?
I think where we sit today, that is correct. Yes.
That's freaking incredible. Okay.
Adam, I think more important, though, after this bond, I mean, there's some cleanup of the existing cap structure, opportunistically refinancing. If you look at the program and the game plan from here on out, we don't really need to go to the debt markets to fund the M&A because the free cash flow profile is going to more than sort of cover the sort of spend. Yes, there's a sort of refi to bring the thing down, but I think we're no longer going to be beholden to the debt market cycle to be able to fund the M&A program because the free cash flow profile will be doing that for us.
No, I get it. The company is pooping cash. I mean, if you guys could do CAD 700 in 2022, figure if you buy things at 5x, I mean, you're generating enough cash that you could buy CAD 140 million of EBITDA per year. It's all starting to kind of come together. This is a very large company. It's a well-oiled machine. It's taken 15 years, but it's all kind of coming together, and it all kind of makes sense. Follow-up housekeeping question. On the deal itself, based on what we've seen in previous years, how should we think about synergy? I mean, it looks like you're paying about 10x headline. Out two years, do you think you guys can get kind of into the mid-8s or under nine based on your historical synergy rating?
Yeah, I think that's reasonable. I mean, listen, we always have the goal from an ownership multiple perspective that over time, we want to own the larger platform opportunities for between seven and eight times. Again, as a public company, we won't take an aggressive approach on how we get there. I think what we've done historically is consistent with that, and in a lot of situations, even lower.
Right. Okay. Let's just take a step back here for a minute. I was in a meeting with Michael Milken, the king of fixed income, and he asked everybody in the audience, he said, "Is debt an asset or a liability?" Everyone says, "Well, the U.S. have too much leverage, blah." He goes, "Well, if I told you that you could have the rest of the world sell stuff at 0% and basically invest in America, you'd do it all day." Debt is an asset if it's properly structured against the right asset. I think I mentioned this in the previous call, or maybe it's the one before that. When I look at the quality of your cash flows.
You've always bought quality, and you've paid up for it, and you've got the right assets, and these are bonds -like cash flows from a cash flow perspective. You just demonstrated it in the second quarter in a total global pandemic. Operating at four turns of leverage when franchise restaurant companies run at 6.5 , Charter runs at 6.5 . This is by no means a leverage company in terms of when you pair the asset cash flow and the liability cash flow. I read these sell-side notes, and these guys look like they're on respirators, they've got COVID. They just don't get it. You're a young guy, and your time is valuable. How do you think about rectifying your equity cost of capital? Is it getting sell-side analysts in other industries?
There was talk that before you went the IPO route that you could have done another LBO. Someone would gladly pay you 15, 16 times for this in the private markets, and they'd be walking at a three-turn discount to Waste Connections and Casella. In the last, I guess, the last 12 months, you bought more EBITDA than Casella bought in 30 years. None of this makes sense to me. I'm curious how you think about all that.
There's a lot in there. Listen, again, the thesis when we did the IPO was take a discount, get it public, get it de-levered, execute our plan. When you execute your plan, our aspirations were to be and get the trading multiples like Casella and Waste Connections, who have done it in the public market for a long time. One thing I would point out is that if you look at Casella particularly, it wasn't so long ago that Casella was a CAD 3 or CAD 4 stock. That being said, John and team and Ned, and the rest of the group there, and Ed Johnson came out with a plan. Now they're trading at 19 or 20 times 2021. My belief is we put our head down, we keep working.
Like I said earlier, smart people around the table don't believe that this business should be trading at 10 or 11 times 2021. That's why they agreed to invest CAD 600 million with us, and they've made a lot of money with us over time. It's very clear to me that as we execute, as we continue growing both organically and through acquisition, as we continue driving incremental free cash flow, as we refi our balance sheet and doing all the things that we said we were going to do to the investors, they gain confidence in us, we show the de-levering event. I think it won't be too long that we do get significant multiple expansion, and that will drive incremental share price. That's the way I think about it. Yes, that option could sell to an infrastructure fund or do whatever. Those options exist.
Listen, I've done five private equity recaps since I started in 13, 14 years. Like I told you and others previously, they were all my best friends until they made 3x their money. That comes with its own set of challenges. I think we have the right recipe for success. I think we have the right management team. We have a solid business plan. Like I said, there was pieces of the puzzle that we wanted to put in place, and all of those pieces of the puzzle are falling into place. When you think about building a puzzle, the hardest time to start the puzzle is when you're at the beginning and you have a million pieces scattered around a box.
I think when you look at what we're doing is a good chunk of the puzzle is already put together, and now we're sort of filling in the pieces. I feel very confident. I think investors will get it. I think people with the value will get there. I think waste, for whatever reason, has had this stigma attached to it that three turns of leverage is the right number. I don't think anybody, given the free cash flow profiles and understanding how the debt markets have moved really materially waiver that. I think as just moving forward, there's opportunity there. Again, Q2 being, like I said earlier, being a significant downturn, leverage didn't move. I think we're safe. Again, we're going to show the market the cash flow strength of the business and how that de-levers over time.
I think again, we'll get that. Other than that, I don't have any ideas. All I can do is focus on running the business. Over time, we'll create a lot of value for a lot of people, as we have for a lot of our investors that have been in the cap structure with us over the last 14 years.
Patrick, it's clear to me that you differentiate yourself from your peer group. You've acquired some of the highest quality assets in the industry. We've seen Brad Jacobs at XPO and Alain Bédard, who you purchased an asset from take sleeping industries and create them into compounding machines. I'm sure you'll take your place in all that. My only recommendation for you is perhaps trying to embark on a different shareholder base or perhaps analyst base that can adequately understand your knowledge of corporate finance because they clearly don't understand them at this point.
Thanks, Adam.
Thanks, Adam.
Welcome.
Thank you. Our last question comes from Michael Feniger with Bank of America.
Hey, guys. Thank you for squeezing me in and taking my questions. Patrick, I believe in the past when you've mentioned opportunities with some of your acquisitions for repricing. Obviously, we're in a different period of time right now as we're navigating COVID. You guys are working with your customers. I understand that's probably the right move to do longer term, keeping those customers. Just longer term, as we look through it, when we think about this WCA business, I'm curious how you look at it. Is there still a repricing on the books here as well? Anything you can kind of share about the organic growth profile of WCA over the last few years as we think of volume and pricing? Just lastly, to wrap it up, obviously all the companies have gone reported. We've seen them go through COVID.
I'm curious if there's anything you're willing to share on how WCA kind of had to perform with their exposure in Texas and Florida as they've gone through the COVID-19 as well?
Yeah. That was part of the delays, was we wanted to watch how the business performed really through Q2. They did an exceptional job, increased margins, and we're actually ahead of plan and ahead of budget. It's been a great performing asset. I think no one ever knows how those businesses are going to react. Again, I think, listen, everyone's going to take their lumps in 2020 like we're seeing. I think that provides incremental upside as hopefully we get things back on track in 2021. Again, like we said, we've always communicated, again, 3.5%-4% price. 1% volume is we think is reasonable sort of going into 2021. I don't think that changes. Like anything, there's always good surprises that come and good opportunities that come. I think we've taken a very conservative approach around the synergies.
We think there's incremental upside organically on that side. We think we're very sort of well-positioned to meet or exceed those expectations that people have for this asset.
Great. Just to follow up, I understand these were the two big pieces of the puzzle for you guys with the U.S. You mentioned how you're going back to bread-and-butter type of M&A and how this kind of helps expand some markets. Do you have a frame of reference for us of maybe the addressable market size that you and your M&A team are looking at now that you have kind of really got more density in some of these markets or you're expanding certain markets? Is there a certain billion-dollar number out there of private small mom and pops that you think you can kind of go after over the time? Is the shift going to be more on the U.S. side or Canada, or is this going to kind of be equal over the next few years?
This is an interesting industry, right? I think the limiting factor will not be the number of opportunities. The governing factor is going to be on ourselves and capital allocation and around the integration side. That'll be the limiting factor. Listen, when you look at Canada alone, there are 2,000+ companies that make up the 70% of the market that the three strategics don't own. You look at the U.S., half the market is still fragmented. To do 25 -30 deals a year is not a lot in terms of sourcing and getting them done. The limiting factor is how many deals can our team integrate? How many deals can our teams work on? Again, we still feel comfortable that 25- 30 deals a year at sort of CAD 1 million-CAD 10 million of EBITDA.
I think that is what you're going to see. I don't see that changing. As the business gets bigger, we continue scaling up that team. I think that positions us very well for our continued growth sort of moving forward. That is consistent with the plan I laid out at the time of the IPO, which was to take the business and double it in size over the next sort of five years. I think with the plan we just laid out, both organically through acquisition growth and the being able to get out the incremental synergies of the business, I think we're now with these two assets in hand, we're well positioned to do that.
Thank you.
Thank you. Our next question comes from Mitch Norden with DOD Asset Management.
Yes. Hi, good morning. I'm wondering.
Good morning.
You can give us an update on the WM ADS transaction. Will that still close and that asset transfer to you close in the third quarter? I also noticed they had disclosed that the purchase price had increased from CAD 835 million -CAD 863 million, increased asset pool. I am just wondering whether that transaction gets a little delayed because of this large announcement today?
No. Again, we've had conversations with the DOJ previously. No. On the WM side, I think the process, again, it's in the DOJ's hands, I think is largely wrapping up. Our expectation is that late August, early September, mid-September at the latest, that process will be wrapped up and moved towards closing. Through this, we'll file our own HSR filing for this. Our expectation is just given the overlap, et cetera, being minimal, that we will get through that process relatively quickly.
Thanks very much.
Oh, on the incremental assets, sorry, I didn't answer that question. The incremental assets, yes, there was two assets that we weren't previously acquiring. One which I talked about earlier was 12 commercial front load routes and a hauling facility in Jacksonville, which is highly complementary with the WCA assets. We acquired a transfer station in the Fort Wayne, Indiana market to service the rental.
Great. Thank you.
Thank you. At this time, we have no other questions, so I'll turn it back to Mr. Dovigi for closing comments.
Thank you very much, guys, and look forward to speaking to you after our Q3 results. Thank you.
Thanks, everyone.
Thank you. Ladies and gentlemen, that concludes the investor update conference. You may disconnect your phone lines, and thank you for joining us this morning.